Friday, August 22, 2008

Buffett and the Trade Deficit

In a 2003 Fortune article, Warren Buffett spoke out about the USA's large and growing deficit problem.

To resolve the trade deficit, he suggests a solution that he admits is somewhat "gimmicky" and "a tariff by another name." His suggestion is something called "Import Certificates" (ICs), which would be issued to US exporters in amounts equal to the amount that they export. An importer would need to purchase ICs in the amount needed for what they want to import.

The Levy Economics Institute examined the potential effects of this proposal in a white paper. They suggested variations on the Buffett template to reduce the economic impacts, including government-sponsored auctions of the ICs. They also note that such a program is likely to lead to retaliatory trade practices by other countries.

Both articles make for very interesting reading. One way or another, the trade deficit will be corrected. If we don't correct it with policy-based solutions, the market will eventually correct it for us. Unfortunately, the Invisible Hand is not known for gentle, controlled transitions.